Centre for Economic Performance Real Wages Update – December 2014

David G. Blanchflower (PIIE) and Stephen Machin (University College London and Centre for Economic Performance, London School of Economics)
December 1, 2014

UK real wages: a long way to go

Prospects for a boost in the real wages of UK workers remain bleak, despite some commentators still continuing to paint a more optimistic picture. This report, the latest in a new series of CEP Real Wages Updates, notes that the most recent wage numbers (for the year to October 2014) show signs of a small pick-up – to nominal growth of 1.4%. But the main reason why the real wage position looks a little better than previously is because price inflation has been falling.

Nominal wage growth is still weak and its future outlook does not look rosy. Placed in the context of how much real wages have fallen, the tiny 0.1% real pick-up contributes essentially nothing to generate a return to where wages were in real terms prior to the fall. The reality remains there is still a long way to go.

In addition, the report:

  • Discusses the shortcomings of some of the available wage statistics (pointing out that their coverage is not as representative as should be expected), and considers the implications of this for the overall picture.
  • Notes that recent falls in unemployment have fed through to wages only slowly, and argues that given the extent of labour market slack, this may still take some time.
  • Documents the weakness of UK real wage growth compared with other countries.
  • Sets the findings in the context of current policy discussions about real wages.

UK real wages: a long way to go

Prospects for a major boost in the real wages of UK workers remain bleak, despite some commentators still continuing to paint a more optimistic picture. While the most recent wage numbers (for the year to October 2014) show signs of a small pick-up, the main reason why the real wage position looks a little better than previously is because price inflation has been falling.

But nominal wage growth is weak and its future outlook does not look rosy. Placed in the context of how much real wages have fallen, the tiny 0.1% real pick-up contributes essentially nothing to generate a return to where wages and earnings were in real terms prior to the fall. The reality remains there is still a long way to go.

Wage statistics from the Annual Survey of Hours and Earnings (ASHE), which is a sample of National Insurance numbers, were released in November for the year to April 2014. The headline numbers do not make good reading – and they stand in stark contrast with the numbers from a year ago that the government greeted with such delight, saying they showed that the crisis in living standards was over.

For the financial year 2014 (with last year’s numbers in parentheses), median annual earnings for all workers grew by 0.9% (1.6%); median weekly earnings grew by 0.6% (2.3%); median hourly earnings grew by 0.2% (2.7%) and mean hourly earnings fell by 0.1% (1.9%). Consumer price inflation in the year to April 2014 was 1.7%, so real earnings growth was -0.8% (median annual), -1.1% (median weekly), -1.5% (median hourly) and -1.6% (mean hourly).

Moreover, the growth rates of private sector earnings also slowed sharply. Median gross annual earnings in the private sector were up 0.8% compared with 2.2% a year ago. Mean weekly earnings in the private sector were down 0.2% in 2014 compared with going up 2.5% in 2013. Median hourly earnings of part-timers were up 1.1% whereas for full-timers they were up only 0.2%.

With price inflation of 1.7%, these correspond to real wage falls. It is because price inflation is coming down, not because nominal wage growth is growing any faster, that the real wage position is not even more drastic. Indeed, this generates a further worry: if prices continue to fall, then firms may well lower their wage offers to reflect changes in the prices of their goods. Deflation is not likely to be good for workers as firms’ ability to pay diminishes.

These numbers reinforce the picture of falling real wages that our previous reports have highlighted (Blanchflower and Machin, 2014a, 2014b). Charts 1 and 2 show the most recent numbers on the change in average weekly earnings (AWE), the UK’s national statistic on pay, published monthly in the Labour Market Statistics release, and from the quarterly Labour Force Survey (LFS), a random sample of employees.